General Electric Co. agreed to buy the well-support division of John Wood Group Plc for about $2.8 billion, adding equipment that helps extract more oil and gas from mature fields. Shares of both companies climbed.
The transaction may close later this year, with the approval of John Wood holders, GE said in a statement yesterday. The business, which also helps extract gas from shale, had sales of $947 million and earnings of $166 million before interest, taxes, depreciation and amortization last year.
GE had already invested about $5 billion in the past five months on energy-related acquisitions, such as the agreement to buy Wellstream Holdings Plc to expand the oil and gas division. GE Chief Executive Officer Jeffrey Immelt is spending a discretionary cash pile of more than $20 billion annually, increasing the dividend last year and restarting acquisitions.
“This is a nice bolt-on deal for GE that adds product breadth in its oil and gas unit,” said Joel Levington, who follows GE for Brookfield Investment Management in New York. “GE’s recent deals, which have focused mainly on fold-in transactions into the core infrastructure units is a reasonable strategic component to its capital allocation plans.”
GE climbed 17 cents to $21.50 at 4:15 p.m. in New York Stock Exchange composite trading. John Wood climbed 14 percent to 652 pence in London trading, the biggest gain since November 2008 and the highest price since shares were offered for sale in May 2002.
GE’s purchase price is about 17 times the well-support unit’s earnings before interest, taxes, depreciation and amortization, John Wood CEO Allister Langlands said on a conference call today.
That compares with a median multiple of 6.6 times ebitda in 21 global oil-field services acquisitions in the past two years, according to Bloomberg data.
“GE will be seen as having paid a full price here, but with this deal financed in cash, the deal will be accretive in year one,” Nigel Coe, a New York-based analyst with Deutsche Bank AG, wrote in a note to investors.
Revenue and cost synergies might add 1 to 2 cents per share to GE earnings over a two- to three-year period, Coe said. He has a “hold” rating on the shares.
The purchase largely completes acquisitions at the oil and gas unit by giving it submersible electric pumps, which help companies extract more from existing projects, an area where the Fairfield, Connecticut-based company expects growth, Vice Chairman John Krenicki said in an interview.
“If you can get a percent or two more out of these giant brownfields,” it can mean more from existing resources, Krenicki said.
‘Jumped on It’
Technology like that of the Wood unit has “changed the game,” he said, pushing GE to pursue the purchase. “We had an opportunity and we jumped on it.”
GE Oil & Gas more than doubled revenue in five years to $7.6 billion last year as Immelt looks to faster-growing and emerging markets to boost revenue and earnings. John Wood, based in Aberdeen, Scotland, plans to return $1.7 billion in cash to shareholders, a regulatory filing said.
GE’s acquisition is the largest of an oil-services unit worldwide in the past year, according to Bloomberg data. The average purchase among almost 40 was valued at $230.7 million.
Krenicki, who oversees the GE Energy businesses, said the company plans to “stick to our knitting” in acquisitions, adding so-called bolt-on purchases in the $1 billion to $3 billion range across the other portions of his businesses, which include the world’s biggest provider of power-generation equipment and services including gas and wind turbines, water treatment and solar panels.
John Wood’s Debt
GE Energy Infrastructure provided $37.5 billion of the parent company’s $150 billion in sales last year.
The purchase today, if completed, would follow Wellstream, and the acquisitions of the Hydril unit of Tenaris SA in 2008 and Vetco Gray Inc. in 2007.
Acquiring the unit, which has about 3,800 employees, is expected to bolster sales and earnings “significantly,” GE said in the statement.
John Wood agreed to buy PSN Ltd. in December to create the world’s leading brownfield production-services provider. Selling the support unit would help pay down debt, Todd Scholl, an analyst at RBC Capital Markets in London, said Feb. 3.
John Wood was pleased with the price GE agreed to pay, Langlands said.
“There was very strong interest from a number of parties on the business,” he said on the call, without identifying them.
GE and John Wood agreed to discuss an arrangement within the gas-turbine sector, according to a John Wood statement. If an agreement isn’t reached in 90 days or by the time the acquisition closes, GE will pay John Wood $50 million.
Last month, GE Energy agreed to buy Lineage Power Holdings Inc. to tap demand for electricity management from a surge in mobile computing as it expands alternative-energy offerings including smart grid, wind and solar.
Credit Suisse Group AG and JP Morgan Chase & Co. advised John Wood, while Citigroup Inc. advised General Electric in the acquisition, according to the companies.
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